Forget PCs: Semiconductors May be Having an Existential Crisis

Traders were obsessed with the IDC report showing much greater declines in PC shipments than expected (see my prior TraderTalk), but a long piece on the semiconductor industry by Barclays is also getting a lot of attention, and deservedly so.

Barclays not only downgraded Broadcom (BRCM), but the entire semiconductor industry this morning (to "neutral" from "positive"), noting "the growth profile in semis is much lower than many expect...."

And it's not just that PC sales are declining: mobile phone sales are maturing, and a lot of other formerly hot consumer products are in decline. Examples:

Blu-Ray/DVD sales are in decline,

Console/Handheld Gaming sales are in decline,

GPS Device sales are in decline,

CD Player sales are in decline, and

Cordless Phone sales are in decline.

Ten years ago, these were growth businesses that spurred massive semiconductor demand. Now, the rise of smartphones and tablets are subsuming other product categories and shrinking semiconductor demand.

But isn't mobile phone sales still increasing? Yes, but the vast majority of the growth is in emerging markets, where U.S. chip suppliers have much less sales potential.

Got it? Revenue growth is likely to be much lower in semiconductors. How much lower? The industry grew an average of seven to eight percent annually over the last 20 years; Barclays thinks it will be low-single digit or even flat going forward.

Of course, this could all change if there is a new consumer "killer category" on the horizon. Do you see one? A smartwatch? Please.

What's this all mean? You wouldn't know there was an existential crisis in semiconductors by looking at the stock prices. The Semiconductor Index is close to a multi-year high, down only 0.4 percent today. Barclays says, somewhat generously, that valuations are "full."